Why career planning is important for investors
Financial advisors often advise, “save first, then spend.” It helps the investors to set aside the savings before the same are exhausted with regular living expenses. It also comes in handy, especially for the investors who find it hard to plan for the future and instead insist on living for the present.
However, having a prudent financial approach is always beneficial for a prosperous financial future, requiring that the income flows and financial aspirations align with career planning. This assumes importance due to the following three factors:
Impacts the consistency in investments
One of the most important principles to stay on the course of the investment journey is to invest regularly. The investors need to have a regular income, which can help them set aside savings that can be invested in mutual fund schemes through Systematic Investment Plans (SIPs).
It is thus easier for salaried investors to plan their savings, for they have consistent cash flows. Further, such investors can also plan their SIP Top-up plans, as the increments in the income can be reasonably estimated. SIP top-up enables investors to increase their monthly savings/investments on periodic basis, which provides a healthy push to the eventual corpus.
In contrast, it may be difficult for freelancers and business persons to commit a sizeable proportion of their income towards mutual fund investments. This is because the income flows may not be consistent throughout the year and maybe uneven. As such, one stays inclined to commit a relatively lower amount to be sure of investments going through every month instead of aiming at a larger investment amount.
Additional financial goals towards professional development
There is also a possibility that one may wish to undergo higher education after a few years of experience. Accordingly, an investor may consider setting aside savings for funding expenses towards further professional development. Most of the executive post-graduation courses offered by premier institutions allow people with some Corporate experience, generally five years or more, to join such courses.
One may keep an investment horizon of 5 years if such planning is undertaken at the inception of the career. With the investment horizon set as per the time remaining eligible for the executive post-graduation courses, one may choose the mutual fund schemes best suiting the investment horizon and risk appetite. In case the investment horizon is shorter, one may consider investing predominantly in debt schemes.
This is because debt funds are relatively less volatile. In contrast, one may opt for equity schemes if the investment horizon is longer, say five years, since equities may be volatile over the short term but have historically been great wealth creators over the long term.
Influences the need to have a suitable financial cushion
Just like a regular income enables an investor to make consistent investments, the absence of regular cash flows may require him/ her to have a suitable financial cushion as well. If the cash flows are uneven across the year, one may consider investing higher amounts in periods of higher incomes and vice versa.
This can also be planned systematically by targeting a specified percentage of the income as the investments instead of a monthly SIP to be invested in mutual fund scheme. Such uneven incomes may also call for a greater need to maintain an emergency fund corpus since such corpus can provide comfort and cushion during financial contingencies.
It is often advised that one should have an emergency fund of at least six months’ expenses, which takes care of most of the issues during financial stress. Such emergency fund corpus should be invested in overnight or liquid funds, for such funds carry minimal interest rate risk and low credit risk. This assumes importance, especially when such corpus may be required to be liquidated at very short notice.
As discussed above, the career progression and need for professional development play an important role in planning a suitable course of action for the investors.
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This material is part of Investor Education and awareness initiative of UTI Mutual Fund.
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